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Your must-have guide to applying for a loan

Hoping to go back to school, buy a car or renovate your home — but need a little help? You're not alone.

Updated September 1, 2021
6 min. read

When you're looking for a little financial help, you may want to apply for a loan or line of credit.

Unfortunately, you can't just snap your fingers and get a loan — you'll need to follow a process to apply. Understanding what you need and getting your documents in order ahead of time can be a huge help. That's why we've rounded up what you need to know before applying for a loan or line of credit.

Who you'll work with

When you apply for a loan, you're considered a "borrower." As a borrower, you typically get a loan from a lender, in many cases a financial institution like a bank.

You'll work with a loan officer at a financial institution who can guide you through the process. They'll work with you to determine how much you can reasonably afford and get you the money you need to reach your goal. A loan officer is your friend, not foe!

Depending on the type of loan or line of credit you want, you might have a co-signer or joint account holder.

For example, if your credit can use some improvement, a co-signer with good credit can help you get approved for a loan. However, co-signers are not just using their signature and good credit to help you out.

Co-signers are legally on the hook if you fail to make your payments. So choose wisely and proceed with caution, while making sure you are both on the same page.

“Interest can add to the cost of the loan in a big way so it's important to crunch the numbers and know the true cost of the loan.”

How to prepare for getting a loan

When you apply for a loan, you're entering into a long-term relationship with that lender. For example, if you're applying for a debt consolidation loan or a home improvement line of credit, it may take years to pay back. Regardless of what type of lending you need, here are some things you should know first.

1. Do your research

You want to do your research before signing on the dotted line. Remember, you're entering a long-term commitment! Think of your research as the dating phase before you say 'I do'. Talk with your lender and make sure you know the costs, terms and conditions.

Here are some questions to consider:

  • What loan or line of credit options are available?

  • What's your best interest rate?

  • What are your repayment terms? Can I make additional payments?

  • Who can help if I have questions along the way?

  • Do I have to provide any collateral?

2. Check your credit

You may have an idea in mind of how much you want to borrow. And of course, you want to score the best interest rate possible. The lender wants that for you too, but your credit does come into play when you apply for a loan or line of credit.

Your credit history and credit score help lenders decide how creditworthy you are — how likely you are to pay back the loan and make on-time payments.

Lenders want to make sure you can pay back the loan. And if your credit isn't too hot, you could be considered a risk to a lender, unfortunately. Making your credit card payments on time and maintaining low balances on your other credit accounts may help you boost your credit score.

3. Figure out your total cost

What you borrow is not what you'll pay. Interest can add to the cost of the loan in a big way, so it's important to crunch the numbers and understand the true cost of the loan. Your principal balance is how much you borrow but that number increases with interest.

Interest is a percentage of your loan, typically expressed as APR (annual percentage rate), that you pay on top of the amount you borrow. When you enter into an agreement with a lender, the interest is how they make their money and get a return on their investment when lending you money.​

For example, you borrow $10,000 for a car and make monthly loan payments for 5 years. If your interest rate is 5%, you'll end up paying $1,322 in interest along with the original $10,000 you borrowed.

You'll want to consider interest rates, repayment term and principal balance to calculate the true cost of the loan.

On top of the interest, you also want to be clear on what your monthly payments will be, so you can add that to your budget.

Documents you'll need

If you need a loan, working with a trusted bank can help you get the money you need at the best rate for you. To get a loan, you'll be asked to provide documentation as part of the application process. Here are some things what to bring on hand:

  1. Identification. You'll want to have a government-issued I.D. on hand. The lender will want your full name, address, phone number, etc. as part of the application.

  2. Pay stubs. Providing your pay stubs can help the lender get a better understanding of your income.

  3. Tax returns. It's a good idea to have at least two years of tax returns ready if you want to apply for a loan or line of credit. This can give lenders a bigger picture of your financial situation.

  4. Other documents as needed. Applying for a car loan? You want to have the bill of sale on hand. If you want to apply for a secured line of credit, provide a mortgage statement as well as recent property tax statements. Depending on the type of loan or line of credit, you may need to provide bank statements, proof of down payment and current balances. You may need to provide your credit report too.

How the lending process works

Once you've done your research and have your documents in order, it's time to apply for a loan or line of credit.

When you apply for a loan: You'll work with a lender or financial institution. You'll submit an application and documentation and will get approved for a specific amount with a specific interest rate and repayment term. Once you have the funding, you can use it for what you need. That's the fun part! After that, you want to stay on top of your repayment to keep your credit in good shape.

A line of credit is a bit different: Unlike a loan, which has a set amount that you borrow and a fixed repayment period, a line of credit is a bit more like a credit card. You have a specific amount of money you can borrow, but you don't need to borrow it all at once. You can just borrow the amount you need as you need it. And when you need more, you can borrow some more, until you hit your credit limit. On top of that, you only pay interest on what you borrow.

A line of credit can help cover home renovations or anything else where you're not certain about all the costs quite yet and how much you need.

The bottom line

If you need a loan, you want to make sure you're working with a company that has your back and can make the process easier. Borrowing money is a big step in your financial life and a stressful one at that. Getting your documents in order and doing your research can help you be an empowered borrower, so you can get the money you need without all the hassle.

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